58. Other information
58.1 Audit fee payable to the audit firm auditing the financial statements
The table below presents the amounts due to the PZU Group’s audit firm (KPMG Audyt sp. z ograniczoną odpowiedzialnością sp. k., “KPMG Audyt”, and members of the KPMG network) for the audit of financial statements of the consolidated PZU Group companies performed by KPMG, paid or payable for the period, plus VAT, determined in accordance with the accrual principle.
| Item | 1 January – 31 December 2021 (PLN 000s) | 1 January – 31 December 2020 (PLN 000s) |
| Audit of financial statements | 9 345 | 8 698 |
| Other assurance services | 5 718 | 4 901 |
| Total | 15 063 | 13 599 |
On 18 February 2014, the PZU Supervisory Board selected KPMG Audyt with its registered office in Warsaw, ul. Inflancka 4A, 00-189 Warsaw, entered by the National Chamber of Statutory Auditors in the list of audit firms under no. 3546 as an entity auditing financial statements for the years 2014-2016, and on 27 April 2017, the PZU Supervisory Board exercised the option of extending this cooperation to include the years 2017-2018. On 23 May 2019, after KNF gave a permit to PZU to extend for another two years the maximum period for the engagement for KPMG Audyt to audit PZU’s standalone and consolidated financial statements, the PZU Supervisory Board made the decision to select KPMG Audyt again as the audit firm to audit the 2019-2020 financial statements.
In connection with Article 49 of the Act of 31 March 2020 amending the Act on special solutions connected with preventing, counteracting and combating COVID-19, other infectious diseases and crises caused by them and certain other acts (“Act”), which extended the maximum period of uninterrupted engagement to carry out statutory audit to ten years by abolishing the limit set forth in Article 134 sec. 1 of the Act of 11 May 2017 on Statutory Auditors, Audit Firms and Public Supervision, on 28 May 2020, the PZU Supervisory Board gave its consent to renew the engagement for KPMG Audyt for reviews and audits of the standalone financial statements of PZU and the consolidated financial statements of the PZU Group for years 2021-2022 with an extension option to 2023. On 7 April 2021, the PZU Supervisory Board agreed to exercise the option and extend the order.
To enable performance of the work described above, relevant annexes to the previously signed agreements were concluded.
The existing cooperation with KPMG Audyt, pertaining to the reviews and audits of the standalone financial statements of PZU and consolidated financial statements of the PZU Group has continued without interruption since 2014.
58.2 Granting of sureties or guarantees for loans or borrowings by PZU or its subsidiaries
In 2021, neither PZU nor its subsidiaries granted any sureties for a loan or borrowing or guarantees to any single entity or any subsidiary of such an entity where the total amount of outstanding sureties or guarantees would be significant, with the exception of the question described below.
On 2 November 2020 PZU entered into Annex no. 1 to the Mandate Agreement to Provide Unfunded Credit Protection from Time to Time with Alior Bank. In addition, PZU entered into Annex no. 1 to the Master Agreement to Provide Counter Guarantees from Time to Time.
Annex no. 1 to the Mandate Agreement to Provide Unfunded Credit Protection from Time to Time defines the rules for PZU to issue insurance guarantees for unfunded credit protection within an exposure limit under instructions from, and in favor of, Alior Bank. The maximum exposure limit for the guarantees issued pursuant to Annex no. 1 to the Mandate Agreement to Provide Unfunded Credit Protection from Time to Time is PLN 4,000 million. The limit is in force for a period of 3 years and is a revolving limit, meaning that the expiry of a guarantee makes the “freed up” amount available within the limit minus any possible disbursements under a guarantee.
The fee for extending the guarantee will depend, among other things, on portfolio amortization and the premium for a counter guarantee. At present, it is not possible to state the amount of the fee for a guarantee since it will depend on the amount of the guaranteed sum and the quality of the portfolio collateralizing the guarantee. The issuance of every guarantee will be preceded by an application from Alior Bank and an evaluation and valuation of the portfolio presented for that guarantee. Alior Bank will present a declaration of voluntary submission to enforcement in the form of a notary deed to collateralize the payment of the fee for a guarantee under the executed Annex no. 1 to the Mandate Agreement to Provide Unfunded Credit Protection from Time to Time.
The maximum term of the guarantees issued under Annex no. 1 to the Mandate Agreement to Provide Unfunded Credit Protection from Time to Time is 5 years. Alior Bank’s share of the due and payable receivables by virtue of the accounts receivable is 10%.
Annex no. 1 to the Mandate Agreement to Provide Unfunded Credit Protection from Time to Time contemplates contractual penalties that may be due to PZU from Alior Bank if Alior Bank breaches certain obligations stemming from Annex no. 1 to the Agreement. The total maximum amount of contractual penalties cannot exceed PLN 3 million. Annex no. 1 to the Agreement does not rule out the possibility of pursuing damages exceeding the sum total of the contractual penalties.
Annex no. 1 to the Master Agreement to Provide Counter Guarantees from Time to Time defines the rules for the Counterparty to provide counter guarantees under instructions from PZU issued in favor of Alior Bank. The available counter guarantee limit is PLN 2,600 million. The available limit will be reduced each time when each counter-guarantee is extended, by the guaranteed amount specified in the counter-guarantee; the available counter-guarantee limit is renewable, which means that the limit is renewed when a counter-guarantee expires.
58.3 Inspections by the KNF Office at PZU
During the period from 27 July to 25 September 2020 KNF conducted an inspection of PZU’s operations and assets in the claims handling area. On 7 January 2021, PZU received a recommendation to refrain from breaching the interests of parties entitled to indemnification under motor TPL insurance, consisting in applying in the calculation of the indemnification using the cost estimate method out-of-date, unreliable data on the man-hour rates in the car repair market that do not match the actual repair costs from the place of residence, seat or the injured party or the place of repair of the vehicle. On 19 February 2021, PZU informed KNF about implementing the recommendations and, on 19 March 2021 provided KNF, on its request, with additional documents and explanations pertaining to the implementation of the recommendation. On 19 April 2021, KNF summoned PZU to present additional documents and explanations, deciding that the evidence presented earlier had not allowed it to consider the recommendation satisfied. On 30 April 2021, PZU provided additional explanations and documents. KNF set the requirements and dates for providing the evidence of implementation. On 7 December 2021, PZU submitted the final implementation report regarding the recommendation. On 28 January 2022, KNF requested additional explanations and documents, which were provided by PZU on 14 February 2022. Until the date of signing the consolidated financial statements, the Polish Financial Supervision Authority did not raise any objections to the manner in which the recommendation was implemented.
During the period from 11 January 2022 to 10 March 2022, KNF conducted an inspection of PZU’s operations and assets in terms of the solvency capital requirement. Until the date of signing the consolidated financial statements, the Polish Financial Supervision Authority did not present an inspection report.
58.4 Cases involving Alior Leasing sp. z o.o.
In December 2020 Alior Bank and Alior Leasing sp. z o.o. received from the former members of the Alior Leasing sp. z o.o. management board summons to an ad hoc arbitration court by the National Chamber of Commerce in Warsaw on account of the management plan. On 30 June 2021, the arbitration court handed down a ruling to discontinue the ad hoc arbitration proceedings regarding this claim. The discontinuation ruling is final.
In December 2021, Alior Bank and Alior Leasing sp. z o.o. received new summons to an ad hoc arbitration court by the National Chamber of Commerce in Warsaw. The grounds for the summons are the same factual and legal circumstances as for the previous ones.
Alior Leasing sp. z o.o. has identified the risk of possible claims against Alior Leasing sp. z o.o. filed by third parties, which may result from actions of some employees and associates of Alior Leasing sp. z o.o. As at the date or preparing the consolidated financial statements, no claims were filed on this account. The PZU Group believes that there are no circumstances justifying recognition of a provision on this account.
The PZU Group will not disclose any further information regarding the possible third-party claims mentioned above, to avoid the weakening of its status and position in the potential proceedings.
58.5 Subsequent events
58.5.1. Intended bond issue by PZU
On 15 February 2022, the PZU Management Board adopted a resolution to submit a motion to the PZU Shareholder Meeting in the matter of issuing subordinated bonds on the domestic market. The contemplated issue is closely related to PZU’s planned early redemption of the series A subordinated bonds issued on 30 June 2017 with a total par value of PLN 2,250 million and a maturity date of 29 July 2027 (Series A Bonds). The terms and conditions for the issue of Series A Bonds contemplate PZU SA’s early redemption option on 29 July 2022.
In connection with the planned redemption of the Series A Bonds, PZU SA intends to issue a new issue of subordinated bonds to replace them and their parameters will be similar to the Series A Bonds. The contemplated issue would be for subordinated bonds on the domestic market with a total nominal value of no more than PLN 3,000 million thousand whose proceeds would be treated as tier 2 own funds according to the Insurance Activity Act and Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).
On 25 February 2022, the PZU Supervisory Board endorsed the PZU Management Board’s motion regarding the issue of bonds. The PZU Shareholder Meeting which is expected to consider the Management Board’s motion has been scheduled for 25 March 2022.
58.5.2. Commencement of the bookbuilding process in connection with the preparation of the bond issue by Alior Bank
On 23 February 2022, the Alior Bank Management Board adopted a resolution granting consent to commence the bookbuilding process in connection with the preparation by Alior Bank of a bond issue which, after obtaining the consent of the Polish Financial Supervision Authority, would constitute Tier II instruments in Alior Bank’s capital.
On 16 March 2022, having analyzed the current market situation, the Alior Bank Management Board adopted a resolution to withdraw from the issue. The decision is related to the extraordinary situation caused by the armed conflict in Ukraine, which is exerting an adverse impact on the financial markets and which might significantly and adversely affect the bookbuilding process. Alior Bank’s intention is to return to the planned bond issue when the situation on the financial markets becomes more favorable.
58.5.3. Acquisition of TFI Energia SA
On 17 March 2022, PZU signed a preliminary agreement to purchase a 100% equity stake in Towarzystwo Funduszy Inwestycyjnych Energia Spółka Akcyjna (“TFI Energia”) from Polska Grupa Energetyczna Spółka Akcyjna. The deal is expected to be consummated in the middle of the year after obtaining approvals from the Polish Financial Supervision Authority and the Office of Competition and Consumer Protection. Following the completion of the transaction, TFI Energia will become a subsidiary of PZU and will be subject to consolidation.
58.5.4. Armed conflict in Ukraine
Due to the invasion of Ukraine by the Russian Federation on 24 February 2022, the PZU Management Board evaluated the impact of this event on the PZU Group’s operations, business continuity, financial standing and future operations.
As at 31 December 2021, the net total assets (assets net of liabilities and adjusted for shares held mutually between PZU Ukraine and PZU Ukraine Life) of the three companies operating in Ukraine (PZU Ukraine, PZU Ukraine Life and LLC SOS Services Ukraine) stood at PLN 70 million.
The assets (net of the shares held mutually between PZU Ukraine and PZU Ukraine Life) of these companies subject to consolidation totaled PLN 554 million, including:
- investment financial assets of PLN 322 million, of which PLN 159 million in instruments issued by the government of Ukraine and PLN 163 million in term deposits;
- reinsurers’ share in technical provisions of PLN 134 million (with PZU’s share accounting for PLN 47 million).
The companies’ liabilities totaled PLN 484 million, including:
- technical provisions of PLN 414 million;
- other liabilities of PLN 70 million.
In addition to the assets of companies operating in Ukraine, as at 31 December 2021, the PZU Group had the following significant debt exposure to markets affected by military actions or sanctions (according to the valuation as at that date):
- bonds issued by the governments of Russia (PLN 90 million), Belarus (PLN 1.6 million) and Ukraine (PLN 4 million);
- PLN 335 million in banking credit exposures and PLN 317 million in off-balance sheet banking exposures (0.16% loan receivables from clients and 0.47% contingent liabilities, respectively).
Due to the escalating political situation, by 3 March 2022, all bonds issued by the Russian, Belarusian and Ukrainian governments were sold (the realized loss of PLN 13 million will burden the 2022 performance).
The war that has covered the whole territory of Ukraine since 24 February 2022, resulting from the invasion of the Russian Federation’s troops, has caused the PZU Group’ Ukrainian companies to operate in emergency mode:
- they operate on a minimum scale wherever possible, while ensuring continuity and maintaining critical processes, with IT systems available;
- since 24 February 2022, PZU Ukraine’s sales processes have been conducted to a limited extent – branches have been closed in cities and towns affected by hostilities, sales have been limited to compulsory third-party liability insurance, travel (accident) insurance and the Green Card;
- PZU Ukraine Life has ceased the sales of new policies;
- claims handling processes in PZU Ukraine Life have been suspended; in PZU Ukraine the functionality of the full claims handling cycle is ensured, while the declaration of martial law across the nation excludes the insurer’s liability for losses incurred due to acts of war;
- the contact center and hotline are operating normally (LLC SOS Services Ukraine);
- the companies keep incurring administrative expenses, including payroll costs (obligation to pay salaries to mobilized employees, recommendation of local authorities to refrain from layoffs, difficulty in determining the number of employees actually working);
- the companies’ financial liquidity is ensured, and payroll liabilities and other obligations, including administrative and fiscal ones, to the extent technically possible, are handled on an ongoing basis.
Moreover, the National Bank of Ukraine (NBU) has introduced, since 24 February 2022, restrictions affecting the conduct of business in Ukraine, including:
- temporary ban on the purchase of foreign currencies;
- suspension of trading in bonds issued by the Ukrainian government;
- ban on international transfers from Ukraine.
Due to the restrictions described above, the PZU Group’s Ukrainian companies will be unable to meet their financial plans for 2022. As at the date of signing the consolidated financial statements, the assessment of the possibility of maintaining business continuity (materialization of the risk of the full loss of operational capabilities) of the PZU Group’s Ukrainian companies is subject to uncertainty due to the following potential threats, among others:
- long-term persistence and escalation of hostilities;
- devastation of energy infrastructure, communication and internet access;
- lack of access to key systems, including due to the destruction of the companies’ physical infrastructure;
- suspension of all internal transfers of funds within Ukraine’s banking system;
- unavailability of staff.
The PZU Group continuously monitors the situation and analyzes potential future scenarios of how the events may unfold. It is currently impossible to reliably estimate future potential impairment losses on assets or present a reliable valuation of technical provisions and other liabilities.